Making Talking Generate Next Billion Dollar

In February 2014, WhatsApp was sold to Facebook for an unbelievable figure – 19 billion dollars. Within the next few weeks, it was all over everybody’s blogs, Facebook statuses, lunch conversations, and even kids in school were talking about it. People could not understand that a company whose only product is a messaging app could be worth that much money.

WhatsApp is not the only messenger out there. Snapchat, Facebook Messenger, LINE, WeChat, and many others are also stakeholders in the industry. They proved to be a cheap alternative to operator-based text messaging via SMS, and they provide many more features that SMS doesn’t have. According to statistics, in August 2015, WhatsApp has an active user number of 800 million, Facebook messenger has 700 million, and WeChat has 600 million. If we just do a simple math and not include all added features that each messenger provides, all chat messengers have a combined valuation of over 200 billion dollars. That’s half of Google or 4 times more than Yahoo!.

Interestingly on the contrary side, all these messaging apps struggled to figure out their revenue model. Evan Spiegel, the co-founder of Snapchat, acknowledged in an interview the extreme difficulty of making a feasible one. Many internet companies are backed by ads revenue. Google, for example, revealed in their multiple annual reports that more than 90% of their revenue comes from ads. One of their many services, Google Adsense, analyzes a web page and provides advertisements that best fit the content of that page. However, most people on messengers send private messages to their friends, and it is impossible to insert any ad into the conversation. Out of privacy concerns, it is also unlikely to run algorithms on user’s messages to provide personalized recommendations.

Realizing this limitation, apps began to expand their service into other communication areas, such as emojis, playing games with friends, sending money, interesting new content, etc. This is a very successful first step. In 2013, LINE reported in their Q2 quarter report, that out of their $100 million quarterly revenue, game purchase and in-game purchase accounted for 53%, and emojis accounted for 27%. Snapchat is piloting the new discovery feature that pushes sponsored content to the user. With the existing ads before playing video revenue model, the company stated that their revenue is estimated at $50 million dollars this year.

In addition to these efforts, LINE and WeChat also aim to build up their own ecosystems. WeChat launched a feature to send money to multiple friends in January 2014. It targets the Chinese tradition of giving monetary gifts to friends and family for auspicious blessings on special occasions. On 2015 Chinese New Year’s Eve, more than 1.5 billion “red envelopes” were sent on a single day. WeChat also keeps a semi-bank account for a user. Besides sending money to friends from the account, the money could also be used to make purchase, refill phone cards, call a taxi, pay utility bills and many more. WeChat has built a successful image within China and it has penetrated into many aspects of people’s life.

In conclusion, the entire messenger ecosystem is very enormous. The user-to-user communication nature allowed exponential growth in the user base. With the vastly and constantly growing user base, companies are able to reach billion dollars valuation within a very short amount of time. The next step, to achieve their billion dollars revenue, companies are experimenting to expand their services into our daily life. LINE and WhatsApp have built up their ecosystem that allows users to call taxis, stream music, order foods, and we can predict soon other companies will have similar strategies to expand their verticals.

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6 responses to “Making Talking Generate Next Billion Dollar”

Thanks for this post, it’s a very interesting read. It it funny to see that most of these communication apps are being valued at millions of dollars, while they are not profitable in the first couple of years. Facebook didn’t pay a 19 billion dollars for WhatsApp because of their huge revenues, but because of their user database. Most tech startups that fail are the ones that start focusing (or even implementing) an advertisement model. I’m convinced that it’s only possible to be a become 19 billion company if you first focus on providing a very convenient platform for users, before thinking about implementing advertisements (or another form of resources). Due to low switching costs, it’s very important to gain a large user base (like very very large). After that, you can add a revenue model without having users leave. Although it sounds rather simple, it will probably remain quite a challenge to become the new WhatsApp.

Interesting Post! Of course everybody was amazed of the dazzling amounts of money spend for these platforms (whatsapp and snapchat etc.). Something that caught my attention was that these investments came from mostly; other platforms! This could be seen as weird since Facebook for instance, has its own messaging app. By acquiring whatsapp, it is almost like they don’t want their users to use Facebook chat.

I think this move can be explainend by wanting to obtain cross-side network efferct. As we now probably all know, is that the goal of a platform pricing strategy is to achieve positive cross side network effects. This means that an increase of users on one side of the platform will cause an increase of users at the other side of the network. By acquiring the users of whatsapp, Facebook could aim on a rise of Facebook users as well. Also the term envelopment comes to mind. This is explained as a acquisition of a platform because the acquirer supplies a multi-platform bundle. This applies to Facebook because they also have a messaging platform. By acquiring its single platform Whatsapp, the total value of the Facebook multiplatform bundle becomes stronger. I think it was wise for Whatsapp to accept its acquisition by this giant, since it was harder to survive on its own. Do you agree?

Very interesting post! I remember the ‘kitchen table’ discussions on the valuation of whatsapp very well. The vast amount of money that facebook paid for whatsapp simply wasn’t justifiable for most people.

Like Julien mentioned it is primarily other platforms that see value in the user bases of these messaging apps due to the cross-sided market effects. I find the comparison between facebook chat and whatsapp especially interesting as both offered comparable services at the time of the acquisition. I can’t help but wonder if the users of facebookchat and the users of whatsapp weren’t largely the same userbase, I certainly used both. In that case wouldn’t an envelopment attempt on the part of facebook be a more logical choice than the (very expensive) acquisition of whatsapp?

This is a very interesting development that is happening here. You don’t need to go to a kiosk anymore, but you just go to a machine. These vending machines on the other hand are also improving. The strange thing however about these machines in Japan is that the response is directly. If you look at developments in Korea or even more nearby at Heathrow airport. At those place you can go to a digital vending machine, you select what you want and it will be delivered at your door at the desired time. So if you get back from your long holidays, your refrigerator will be emptied out probably before you leave. So instead of having to carry all the groceries you need to buy when you get back, in London now you can select what you want and it will be delivered at your place when you come back from your flight. So I think that, buying it at one moment and having it the delivered later will be the future.

Indeed very nice post, it’s quite interesting to see how the basis of competition has changed so drastically in these new platform markets. No longer do traditional measures such as return on assets and price to earnings ratios really capture the value of players and the industry, it’s all shifted towards network effects. But does it really reflect the true monetary value of these firms? I mean just as we see with market valuations and the unreal costs of acquiring such firms, like Facebook and whatsapp, almost the entire value is based on this network effect. Is that really sustainable in the long run?

These firms really need to differentiate their offerings, but they also need to venture into other forms of business, like Google with its ads. The incredible difference in market value and revenue for example in snapchat just shows us that the business model does not provide sufficient returns. And this is also what gives a bad name to startups, they can acquire insane amounts of capital that no bank would rationally provide given the same kind of pitch that startups give to venture capitalists.

The IT enabled industries have many great benefits, however they are benefits and should not be mistaken with competitive advantages. For example, as 364873kb commented, the general user group of Facebook and whatsapp is the same – most people that use one already have the other. I don’t see the benefit of acquiring a platform at such a high price when you already serve the majority of the platform yourself. So what is the true benefit that Facebook is really seeking from this acquisition?

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